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The were some free trade skeptics. During the 1992 presidential campaign, Ross Perot, a Texas businessman who ran as a third-party candidate, had warned that the completion of NAFTA would lead to a “giant sucking sound,” as companies and jobs moved to Mexico. Many labor groups also opposed NAFTA, the results of which were less dramatic than Perot had predicted. Some US companies, particularly auto companies, did shift production and well-paying jobs south of the border, but manufacturing employment as a whole remained stable during the eight years that Clinton was in office,37 and total nonfarm employment rose by about 23 million.38 Workers’ wages continued to stagnate, though, and inside the administration there were some debates about whether globalization was playing a role.

One official who raised this question was Joseph Stiglitz, a Princeton economics professor who joined the White House Council of Economic Advisers in 1995 and subsequently served as its chair. In the economics world, Stiglitz was known as a brilliant theorist who had written influential papers on subjects ranging from finance to public economics to labor economics. A member of the “new-Keynesian” school, whose members sought to provide a rigorous microeconomic foundation for Keynesian macroeconomics, he was most renowned for his work on information asymmetries, in which one party to an economic transaction has certain information that another party lacks. (A classic example is that someone looking to buy auto insurance knows more about how likely they are to drive recklessly than the insurance company does.) Stiglitz viewed himself as a centrist, but he had a progressive streak. As an undergraduate at Amherst in the early 1960s, he had participated in the March on Washington. And while growing up in Gary, Indiana, a steel town, he had seen how cheap foreign competition could hollow out once-thriving communities.39

In principle, Stiglitz supported expanding trade based on arguments that went back to Smith and Ricardo: by expanding markets and encouraging international specialization, trade raised efficiency and expanded overall welfare. But Stiglitz was also sensitive to the fact that trade created losers as well as winners, and that the losers were likely to include many US workers who made things that competed with products made in China and other low-wage countries. “Wages of unskilled workers would fall and employment would increase,” Stiglitz later recounted. “But when I put this observation before my colleagues in the Clinton administration, they shrugged their shoulders.”40 In early 1994, the White House did propose a federal retraining program for workers who had lost their jobs because of trade deals or corporate downsizing. But the proposal never got anywhere on Capitol Hill.

Another issue that concerned Stiglitz was the Treasury Department’s support for financial liberalization, both at home and in developing countries. In his 2003 book, The Roaring Nineties, Stiglitz recounted how in 1993, before he joined the administration, the White House Council of Economic Advisers had opposed Treasury’s efforts to force South Korea to liberalize rapidly. At the time the Treasury secretary was Robert Rubin, a former cochairman of Goldman Sachs. Stiglitz thought he detected the influence of the Wall Street lobby. “Why push Korea to move faster?” he wrote. “What would Americans gain by having Korea liberalize a few years earlier than it otherwise would have done? American workers would gain nothing, but Wall Street firms were worried: gradual liberalization might allow others to enter as well, or even enable Korean firms to compete on an equal footing.”41 The White House economists lost the debate, and the Treasury Department’s view prevailed, Stiglitz recalled.

In 1997 Stiglitz left the White House and joined the World Bank. What he found most troubling as he made the job switch, he would later recount, was that the Treasury Department and the IMF were busy promoting policies abroad that clashed with the Clinton administration’s domestic positions. “We fought against privatization of Social Security at home, while we pushed it abroad,” he wrote. “At home, we fought against the balanced-budget amendment, which would have constrained our ability to use expansionary fiscal policy in the event of a downturn; but abroad, we imposed contractionary fiscal policies on countries going into recessions …

We pushed market fundamentalism on the rest of the world, both directly and through the IMF. I could have understood Ronald Reagan or Margaret Thatcher doing this. I could not understand Bill Clinton doing this.”42

Stiglitz wasn’t the only prominent economist in the Clinton administration. In 1993 Harvard’s Lawrence Summers was appointed under secretary for international affairs at the Treasury Department; in 1995, he was promoted to deputy secretary; from July 1999 to January 2001, he served as Treasury secretary. Like Stiglitz, Summers was an Ivy League Keynesian with some liberal credentials. In the 1980s, he had coauthored a paper that argued that hostile takeovers, rather than creating real economic value, merely shifted “rents” from a firm’s workers and suppliers to its stockholders.43 By the mid- to late 1990s, however, Summers’s economic views had shifted. He now referred to himself as a “market-orientated progressive”44 and publicly extolled the virtues of free market capitalism. “What’s the single most important thing to learn from an economics course today?” he said to Daniel Yergin and Joseph Stanislaw, the authors of the 1998 book Commanding Heights. “What I tried to leave my students with is the view that the invisible hand is more powerful than the hidden hand. Things will happen in well-organized efforts without direction, controls, plans. That’s the consensus among economists. That’s the Hayek legacy.”45

As under secretary for international affairs and then as deputy secretary of the Treasury, Summers was the Treasury’s point man on globalization, which meant dealing with the IMF and other international agencies. In his public appearances, he acknowledged some of the challenges that greater international integration posed, such as threats to labor standards and impingements on national sovereignty. But he also defended free trade and economic openness, arguing in a 1999 speech that their benefits “show up in the form of higher living standards resulting from higher wages and higher returns to capital and quite likely in the form of higher rates of growth.”46 In the same speech, Summers challenged the argument that globalization led to job losses in rich countries and emphasized the rapid economic growth that some developing nations, especially China and India, were experiencing. “More than a quarter of humanity is enjoying growth at rates where living standards quadruple within a generation,” he said, adding that this was “unprecedented in economic history.”

Official figures suggested this was true. But while Summers was at Treasury the era of hyperglobalization experienced its first major blowup. In the summer of 1997 a financial crisis erupted in Thailand and quickly spread to South Korea, Indonesia, Malaysia, and Singapore. Currencies plunged, stock markets crashed, economies fell into recession, and some of the afflicted countries were forced to ask the IMF for emergency loans. During the previous two decades, these East Asian countries had been among the most economically successful in the world: poster boys for globalization. Nonetheless, the IMF, backed by the US Treasury Department, followed its usual crisis playbook and demanded that they raise interest rates, cut their budget deficits, and restructure their financial sectors. These austerity policies deepened the economic slump. In 1998, inflation-adjusted GDP plunged by 6.7 percent in South Korea, 7.4 percent in Malaysia, and 13.1 percent in Indonesia.47 Bankruptcies and joblessness soared.

Throughout Asia, this experience generated a backlash against the IMF and the Washington Consensus. In September 1998, the Malaysian government of Mahathir Mohamad targeted international speculators by introducing controls on the movement of financial capital and fixing the country’s exchange rate against the dollar. Rather than causing the earth to cave in, these two violations of IMF orthodoxy bought Malaysia some respite from relentless market pressures, and other Asian countries noticed this success. They didn’t follow Malaysia’s example directly. But many of them started to build up vast reserves of foreign currencies, which they hoped would make them less vulnerable to a future crisis and less likely to have to deal with the IMF.

In the years preceding the blowup, East Asia had seen big influxes of financial capital and run up large debts. Even among supporters of globalization, the ensuing crash raised doubts about the wisdom of liberalizing capital flows. In a 1998 article, “The Capital Myth,” Jagdish Bhagwati, a Columbia professor who was a prominent supporter of trade liberalization, argued that Washington policymakers had made a big error by treating money as just another commodity and letting it flow across borders at will. Unlike trade in tangible items like clothes and computers, international flows of money are sometimes driven by speculative manias, which often end in a bust. In foisting financial liberalization on the rest of the world, Bhagwati said, the “Wall Street–Treasury complex” had been “unable to look much beyond the interest of Wall Street.”48

After Stiglitz left the World Bank in 2000 and moved to Columbia University, he publicly criticized the US government and the IMF for the policies they had imposed on Asian countries. In a 2002 book, Globalization and Its Discontents, he argued that the primary cause of the crisis had been “excessively rapid financial and capital market liberalization,” and he added that the IMF’s draconian demands made a bad situation worse.49 Broadening his criticisms, he said the lending agency routinely made decisions “on the basis of what seemed a curious blend of ideology and bad economics, dogma that sometimes seemed to be thinly veiling special interests.” Rather than considering each country on its merits, the fund followed a “standard” template that it was loath to alter.50 “Alternative opinions were not sought,” Stiglitz wrote. “Open, frank discussion was discouraged—there was no room for it  … These attitudes made me cringe.”51

In Stiglitz’s account of globalization, the IMF was the arch-villain, and its commitment to market fundamentalism was part of a larger problem, the same one Amin had pointed to: the lack of a coherent and politically accountable framework to oversee and manage international integration. “Instead, we have a system that might be called global governance without global government,” Stiglitz wrote, “one in which a few institutions—the World Bank, the IMF, the WTO—and a few players—the finance, commerce, and trade ministries, closely linked to certain financial and commercial interests—dominate the scene, but in which many of those affected by their decisions are left almost voiceless.”52 To remedy this situation, Stiglitz called for reform of the Bretton Woods institutions, including changes to their voting structures. He insisted that globalization as currently constituted wasn’t working for many of the world’s poor, for the environment, or for the stability of the global economy. Capitalism was at a crossroads, just as it had been during the Great Depression, when Keynes saved the system by laying out a new policy framework that created jobs and stabilized the world economy. “Now,” Stiglitz concluded, “millions of people around the world are waiting to see whether globalization can be reformed so that its benefits can be more widely shared.”53

The publication of Globalization and Its Discontents wasn’t universally welcomed. The Harvard economist Kenneth Rogoff, who was the IMF’s chief economist at the time, dismissed the book’s policy recommendations as “at best highly controversial, at worst, snake oil.”54 Stiglitz’s focus on the crisis programs of the IMF did present a somewhat narrow view of globalization, but his basic argument that market fundamentalism had led to big problems was hard to dispute. The failure could be seen in the diverging fates of post-Communist Russia and post-Maoist China as they transitioned toward capitalism. Russia, following the advice of market-friendly Western economists, liberalized prices, jettisoned state planning directives, and privatized state-owned firms; China adopted a more gradual and nuanced approach, maintaining a large state-owned sector and allowing private, market-driven enterprises to emerge alongside it. During much of the 1990s, China’s GDP grew at double-digit rates. In Russia, GDP collapsed, poverty soared, and life expectancy plummeted. “The contrast between what happened in China and what has happened in countries like Russia, which bowed to IMF ideology, could not be starker,” Stiglitz noted.55

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By the start of the new millennium, Stiglitz and Asian policymakers weren’t the only ones who were having second thoughts about globalization. In many countries, there was widespread concern about Western firms outsourcing production to countries where sweatshops, child labor, and dangerous working conditions were common. In May 1993 a fire at a toy factory on the outskirts of Bangkok killed at least 188 people and likely many more. (Some of the factory’s workers were never accounted for.) “All but fourteen of the dead were women, most of them young, some as young as thirteen years old,” the American journalist William Greider recounted in his 1997 book One World, Ready or Not. “Hundreds of the workers had been trapped on upper floors of the burning building, forced to jump from third- or fourth-floor windows, since the main exit doors were kept locked by the managers, and the narrow stairways became clotted with trampled bodies or collapsed.”56

Greider had traveled to Thailand, where he toured textile factories, spoke to workers, and visited some of the rural villages from which many of them hailed. Unburdened by an economics PhD, the veteran journalist had a firm grasp on the realities of the new global economic order. Kader Industrial Toy Company of Thailand, the business that owned the burnedout Bangkok facility, manufactured items for Toys “R” Us, Fisher-Price, Hasbro, and JCPenney, he pointed out. Among the items found in the wreckage of its factory were dolls depicting the Muppets, Bugs Bunny, and Big Bird. Although the Thai company bore primary responsibility for the unsafe working conditions, the factory fire “was ordained and organized by the free market itself,” Greider wrote. “The toy industry—much like textiles and garments, shoes, electronics assembly, and other low-wage sectors— existed (and thrived) by exploiting a crude ladder of desperate competition among the poorest nations. Its factories regularly hopped to new locations where wages were even lower, where the governments would be even more tolerant of abusive practices.”57 The Kader Industrial Toy Company had recently opened two factories in China, a country where many young women worked fourteen hours a day. Greider posed the question: “Why should a company worry about sprinkler systems or fire escapes for a dusty factory in Bangkok when it could hire brand-new workers in China for only \$20 a month, one fifth of the labor cost in Thailand?”58

Why indeed? In the United States and Europe, concerns about sweatshop labor, corporate greed, and climate change fed the growth of an anti-globalization movement that included labor union members, environmentalists, human rights and peace activists, and anarchists committed to overthrowing capitalism. The new World Trade Organization (WTO) was the focus of many of these groups’ anger. At the end of November 1999, tens of thousands of protesters converged on Seattle, Washington, where the WTO was holding a four-day ministerial meeting that President Clinton was scheduled to attend. On the first morning, the demonstrators blocked intersections and resisted police efforts to disperse them, which included the use of tear gas. Most of the demonstrators were peaceful, but hundreds of anarchists smashed shop windows, sprayed graffiti, and set bonfires.59 The opening ceremony had to be canceled, and the mayor of Seattle declared a state of emergency.60 Protests, arrests, and sporadic violence continued throughout the meeting and generated media coverage around the world.

In a 2000 article motivated by the Seattle protests, Dani Rodrik noted that globalization was facing “a deep crisis of legitimacy that threatens to overwhelm the world’s trading regime.”61 Far from reversing course, Western governments had expanded their commitment to bringing down trade barriers by agreeing to admit China to the WTO despite complaints about its human rights record and weak labor laws. China formally joined the organization in December 2001. During the ensuing years its commodity exports to the United States and other Western countries rose at astronomical rates: between 2001 and 2008, their value went from \$19.8 billion to \$115.5 billion.62 This unprecedented surge coincided with a sharp drop in US manufacturing employment, from 17.1 million in January 2001 to 13.7 million in January 2008.63

These developments intensified the debate about the consequences of globalization, and even some skeptical economists started to take seriously the idea that trade was harming workers in the developed world. The strongest counterargument that globalization’s advocates put forward was the one Summers had made: it was helping to lift hundreds of millions of people in poor countries out of acute poverty. In his 2004 book, In Defense of Globalization, Jagdish Bhagwati cited figures from the Asian Development Bank that showed that between 1978 and 1998, the poverty rate in China had fallen from 28 percent to 9 percent, and in India from 51 percent to 26 percent.64 “With the usual caveat that in the social sciences one can rarely establish the degree of credibility for one’s argument that one can aspire to in the physical sciences,” Bhagwati wrote, “one can conclude that freer trade is associated with higher growth and that higher growth is associated with reduced poverty.”65

That wasn’t the entire story, however. The most widely used international poverty threshold, which researchers at the World Bank had created, was extremely low. It was originally set at an income of \$1 a day, adjusted for different prices across countries. Following criticisms, the bank raised the threshold to \$1.25, and in a paper first published in 2008, two of its economists, Shaohua Chen and Martin Ravallion, provided revised poverty estimates. The good news was that they still showed a big drop. Between 1981 and 2005, the number of people in the developing world who were living under the \$1.25-a-day poverty line declined from about 1.9 billion to about 1.4 billion people. Taking into account population growth, this translated into a shift from about half the population to about a quarter of the population.66 Obviously, this was a very welcome development, but the regional breakdowns in the Chen and Ravallion paper showed that it needed to be interpreted carefully. The decline in acute poverty was heavily concentrated in China. Between 1981 and 2005, the number of Chinese living on less than \$1.25 a day fell from 835.1 million to 207.7 million—a drop of 627.4 million.67 Excluding China from the global figures, the number of people living under the \$1.25-a-day threshold slightly increased over the period, from about 1.1 billion to about 1.2 billion.68 In India, the acute poverty rate fell from 59.8 percent to 41.6 percent,69 but because of very rapid population growth, this decline translated into a slight rise in the absolute numbers.70

Taken overall, these figures confirmed that the developing countries that had engaged most strenuously with globalization—China and India— experienced rapid economic growth and historic drops in rates of acute poverty. It’s hard to overstate the significance of these developments. Two centuries after industrial capitalism emerged in Britain, some developing countries were finally beginning to close the huge income gap with the West that had opened in the nineteenth century and continued to widen during the twentieth. On a worldwide basis, the income distribution was finally getting a bit more compressed. One commonly used measure of inequality is the Gini coefficient, which is named after the Italian statistician and demographer Corrado Gini. Beginning around the year 2000, the Gini coefficient for global income started to fall.71

On the other side of the ledger, globalization appeared to be generating higher levels of income inequality within individual countries, including the United States and China. Moreover, the gap between the richest and poorest nations was still a gaping one. In 2005, according to the World Bank, US GDP per capita was \$44,123, compared to \$417 in Malawi and \$334 in Tajikistan.72 In some parts of the developing world, the absolute number of people in acute poverty was rising sharply. In Sub-Saharan Africa and South Asia, Chen and Ravaillon reported, the figure had risen from 762 million people in 1981 to 986 million in 2005, an increase of nearly 30 percent.73 Globalized capitalism was lifting some boats, but certainly not all of them.

The Asian Financial Crisis and the failure of shock therapy in Russia dented the Washington Consensus, but the biggest blow to market fundamentalism came in 2007, with the onset of the Global Financial Crisis. The drama began with the bursting of a US real estate bubble, which had been pumped up by low interest rates, lax lending standards, and property speculators.74 As home prices fell, many homeowners who had taken out “subprime” mortgages that they couldn’t really afford defaulted on their loans. This wave of defaults, in turn, caused a collapse in the price of subprime mortgage securities, which Wall Street investment banks had cobbled together from baskets of high-risk home loans, falsely claiming they were safe. The next daisies in the chain were the Wall Street firms themselves, in particular Bear Stearns and Lehman Brothers. As Bear tottered on the brink in March 2008, the US Treasury and the Federal Reserve orchestrated a rescue, in which the Fed provided an emergency loan and JPMorgan Chase bought the firm’s operations for a song. Six months later, when Lehman found itself in a similar pickle, the Treasury and the Federal Reserve refused to bail it out. On Monday, September 15, 2008, Lehman filed for bankruptcy.

The subprime blowup provided confirmation for Hyman Minsky’s Financial Instability Hypothesis, which he had expounded in the 1970s. As the great real estate boom proceeded, the level of risk-taking by homeowners, mortgage providers, and Wall Street issuers of mortgage securities gradually ramped up. By the later stages, mortgage providers were issuing home loans to buyers who, based on their incomes, couldn’t hope to meet the true financing costs, and often didn’t even understand the nature of the commitments they were taking on. In many cases, their loans came with low “teaser” rates that lasted for only a year or two before resetting to much higher rates. The idea was that the buyers would refinance before the reset date, using the capital gains they made from further increases in house prices. Of course, this scheme only worked as long as prices kept rising. In Minsky’s terminology, it was “Ponzi finance.” When home prices plunged, the Ponzi scheme collapsed, almost bringing down the entire financial system with it.

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